Legal Notices

If this is you, we can help...  Investment officers looking to earn a designation for career advancement  CPAs in need of online continuing professional education (CPE) credits  Investors needing the bond market basics to demystify sometimes murky financial concepts  Anyone looking for the flexibility of an online education and training option

Related Links

WASHINGTON - The Internal Revenue Service will use the information that tax-exempt hospitals submit to it under the new Form 990 to determine if they provide enough community benefits to remain tax-exempt, a top IRS official said this week.

The agency also is considering overhauling its community benefit standard, which dates back to 1969 and has not kept up with major changes in the hospital sector, Steven T. Miller, the IRS tax-exempt and government entities commissioner, said in a speech before the Texas attorney general's office in Austin on Monday.

Miller's comments come as IRS officials and members of Congress have increasingly become concerned in recent years that tax-exempt organizations are not acting enough like nonprofit, charitable organizations to warrant their tax-exempt status and their access to the municipal bond market.

"This is part of the IRS looking into increased compliance and accountability for various nonprofits," said Vicky Tsilas, an attorney with Ballard Spahr Andrews & Ingersoll LLP here. "I think the IRS is focusing in on this, and really trying to draw a distinction between a for-profit hospital and a not-for-profit hospital."

Miller said the IRS' new Form 990, and particularly its hospital-specific Schedule H, should provide the agency with much more detailed information about the benefits nonprofit hospitals provide to the community.

The new form and schedule were published by the IRS earlier this year, and hospitals will have to respond to them beginning in connection with tax returns they file for fiscal 2009.

Before the IRS revised the form, "the determination and measurement of community benefit was, as a practical matter, largely a matter of individual discretion," Miller said. "Every hospital had its own way of measuring community benefit - its own view of what counted and how to report it."

"To the extent we have had any community benefit reporting ... in the past, it has been inadequate, at best, and more fairly could be characterized as uneven and haphazard," he said.

The IRS had no way of analyzing and comparing hospitals and their benefits to their communities, according to Miller.

But the new Schedule H addresses the problem by requesting uniform and more detailed information from hospitals, particularly, "the what, the how, and the by whom aspects of community benefit," he said.

For example, the new form will provide some clear standards on what types of activities qualify as beneficial to the community, Miller said.

"I believe the data from the new Schedule H will allow us, and other observers, to analyze how - and how much - hospitals around the country are benefitting their communities," he said.

The new Form 990 is the latest attempt by the IRS to better determine which organizations deserve their tax-exempt status, according to Tsilas.

"It is asking nonprofits for an incredible amount of information, and that all goes with the general trend of revisiting nonprofits and making sure they're spending the money for what they said they're going to be doing," she said.

However, Miller emphasized that the schedule will not "provide a bright-line standard against which the reported data can be assessed to determine whether the reporting hospital should be tax-exempt or should be taxed .... The Schedule H simply was not built to do all these things. It was built to enhance transparency and compliance in this area."

Miller explained the problem with the current 40-year-old community benefit standard, which was established by a 1969 IRS revenue ruling.

Under the ruling, the extent to which a hospital provides community benefit is based on whether it has a community board, an open medical staff, a full-time emergency room open to everyone regardless of their ability to pay, and an open admission policy. Another important factor is how hospitals use their excess funds.

But these factors "no longer meaningfully distinguish one type of hospital from another," Miller said, adding the standard "may need a tune-up; it may need a new engine; we may need a new vehicle."

An update would have "a significant impact on certain hospitals," he said, citing a recent IRS survey of hospitals. "Any significant changes to the community benefit standard would almost certainly benefit some hospitals and adversely affect others - there will be winners and losers."

Results from the 2006 survey sent to over 500 nonprofit hospitals showed that hospitals varied widely in terms of how much charitable and other uncompensated care they provided, Miller said. The varied responses suggest that some hospitals would have trouble meeting a new standard while others would have no problem, he suggested.

The interim results of the survey were released in 2007, and the IRS hopes to release the final results in the near future.

Miller noted that increasingly, hospitals have to comply with state standards that may be tougher than the federal standards for tax exemption. He cited Provena Covenant Medical Center, which is battling the Illinois Department of Revenue in the state Supreme Court to regain its property-tax-exempt status after the department revoked it two years ago, arguing the hospital spent less than 1% of its revenues for charity care. The outcome of the case could affect the millions of dollars of the hospital's bonds that are still outstanding.

"It increasingly appears that federal tax exemption is no longer always dispositive of how a state or local government will regard a hospital," he said.